All posts for the month November, 2011

A hedge fund is a private pool of capital actively managed by an investment adviser.[1][2] Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university endowments and foundations, or high net worth individuals. Worldwide, 61% of investment in hedge funds is from institutional sources as of February 2011.[3] The funds generally invest in a diverse range of assets and employ a variety of investment strategies.

Hedge funds are distinct from mutual funds, individual retirement and investment accounts, and other types of traditional investment portfolios because they can undertake a wider range of investment and trading activities, and invest in a broader range of assets, including equities,bonds and commodities.

Most hedge fund investment strategies aim to achieve a positive return on investment whether markets are rising or falling. Hedge fund managers typically invest their own money in the fund they manage, which serves to align their interests with investors in the fund.[4][5]Investors in hedge funds typically pay a management fee that goes toward the operational costs of the fund, and a performance fee when the fund’s net asset value is higher than that of the previous year. The net asset value of a hedge fund can be billions of dollars, due to investments from large institutional investors. As of 2009, hedge funds represent 1.1% of the total funds and assets held by financial institutions.[6] The estimated size of the global hedge fund industry is US$1.9 trillion.[7]

Because hedge funds are not sold to the public or retail investors, their advisers have historically not been subject to the same restrictions that govern other investment fund advisers, with regard to how the fund may be structured and how strategies are employed. Hedge funds must now comply with many of the same statutory and regulatory restrictions as other institutional market participants.[8] Regulations passed in the United States and Europe after the 2008 credit crisis are intended to increase government oversight of hedge funds and eliminate any regulatory gaps.[9] (more)

The man who went on a 30-year winning streak, amassing hundreds of millions and keeping it, first started out like this:

Billy Walters moved to Las Vegas… with his family and his immense ego and very little else. He was worth more dead than alive, as they say. For too many years he had been operating a used-car dealership in his home state of Kentucky, and then gambling away the profits. In 1982 he plea-bargained to a misdemeanor bookmaking charge – possession of gambling records, it was called – and was sentenced to six month probation and a $1,000 fine. He was in debt to several bookmakers, and he could not command credit. At 35, into his third marriage, with an ill son who was supposed to have died years before, Billy Walters believed he had no alternative but move to Las Vegas, to be a full-time professional gambler, to lay all that he had on this one final hand.

Walters can pinpoint his problems from those days, now that he is worth millions of dollars. As recently as 1982, when he was preparing to leave Kentucky, he had lacked focus. He was a gambler, that was definite, but he had no idea how to gamble professionally. He wanted to win every single day. When he lost at the race track or when he lost betting games or when he lost playing poker or when he lost playing golf, he always felt compelled to get down another bet, to retrieve what he had lost that very day. He recalls an evening in Kentucky when he was pitching nickels with a friend. The wagers grew until Billy Walters had lost his house – his house, from pitching nickels.

Then he had to come home and tell his wife. “I’m not one to beat around the bush,” he says. Standing now in his kitchen, head down, hands in pockets, he seems to be recreating the scene. “I just came home and said to her, Look, honey, I was pitching nickels with a guy today, and I lost the house. And we might have to move.’” They didn’t have to move but it took Billy Walters a year and a half to pay off the mortgage incurred by the revolution of the five-cent coin. He kept the house, but he lost his wife. She left him. That was his second wife. “She couldn’t take it. Fifteen times I’ve come home where I’ve lost every single penny we’ve got,” he says, as if revealing a scar.